How Noncompete Clauses Keep Workers Locked In

istock_000004809289xsmallThis New York Times article, How Noncompete Clauses Keep Workers Locked In, is just the most recent example of the national attention non-compete clauses are now capturing. The article examines the potential devasting impacts of non-compete clauses and the lawsuits filed to enforce them. Employees everywhere should read the article, but here a couple of quotes that highlight the importance of these issues:

“By giving companies huge power to dictate where and for whom their employees can work next, noncompetes take a person’s greatest professional assets — years of hard work and earned skills — and turn them into a liability.”

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“But the move to tie workers down with noncompete agreements falls in line with the decades-long trend in which their mobility and bargaining power has steadily declined, and with it their share of company earnings.”

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“It’s one thing to have a bump in the road and be in between jobs for a little while; it’s another thing to be prevented from doing the only thing you know how to do.”

– Max Burton Wahrhaftig, an arborist in Doylestown, Pa.

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Requiring a non-compete reveals much about an employer’s human resources philosophy; the right work is subordinated to an employer’s desire to protect itself from competition — in a free market economy no less.  In too many instances, a non-compete requirement reflects an abuse of the disparity in bargaining power.  It can signal an ideology that employers are sovereign and employees are the property of the employer, even after they are fired (without cause).  And even where the employer has legitimate concerns and interests at stake, the non-competes clauses are usually overbroad and unfair.

However, from the employee perspective, signing a non-compete can reflect a mindset that focuses on short-term gain while ignoring long-term risks. Employees who act like serfs will be treated as serfs.  There is no doubt that an employee has a little choice when s/he is presented with the choice between signing or losing her/his job. But, those employees who have choices and bargaining power should exercise it in furtherance of the right to work.  So, read the NY Times article and beware.

Trans-Obligation: The Non-Disclosure Agreement (NDA) is Really a Non-Compete.

A handsome young businessman tied up and sitting at his desk

So, an employee signs an employment agreement.  The agreement contains (among other things) non-compete provision and a non-disclosure provision (NDA).  The employee wants out of both obligations.  Otherwise, his ability to earn his best living will significantly be restrained by each.  

If the NDA actually is read literally then every bit of the industry related information is defined as his former employer’s “Confidential Information.”  If enforceable, he would be completely prohibited from using it anyway or at any time.  Wow. This NDA is really a non-compete dressed up as something appearing more innocent.

On March 1, 2017, the South Carolina Court of Appeals confronted a similar set of facts when it invalidated an employment agreement containing a noncompete and NDA. In Fay v. Total Quality Logistics, the Court of Appeals found the definition of “Confidential Information” in an employment agreement’s non-disclosure provision was so broad as to function as a non-compete.  Because an enforceable non-compete agreement requires a reasonable time limitation and because the non-disclosure provision lacked such a time limitation, the Court of Appeals held the entire agreement unenforceable. 

It’s a bird.  It’s a plane.  It’s Muckenfuss.

The Fay decision reaffirms the public policy recognized in Muckenfuss: the right to pursue our greatest worth.   South Carolina appellate courts have demonstrated a consistent recognition of this “right to work.”   Courts subject restrictive covenants and non-disclosure agreements to close scrutiny in deference to the public policy in favor of competition and in defense of this:

“[T]he right of an individual to follow and pursue the particular occupation for which he is best trained is a most fundamental right. Our society is extremely mobile and our free economy is based competition. One who has worked in a particular field cannot be compelled to erase from his mind all of the general skills, knowledge and expertise acquired through his experience. These skills are valuable to such employee in the marketplace for his services. Restraints cannot be lightly placed upon his right to compete in the area of his greatest worth.”  Carolina Chemical Equipment Company v. Muckenfuss, 322 S.C. 289, 471 S.E.2d 721 (S.C. Ct. App. 1996).

Bottom line: Regardless of its form, a contractual infringement on the right to work must be no more than is absolutely necessary. If the infringement goes any further, the agreement will be invalidated.

Let’s chalk another one up for the good guys!

Noncompetes In Court: Attorney’s Fees

Is law like craps?As mentioned in the prior post, I was in court in October (2016) and tried a non-compete case for my client. The judge ruled for us on all causes of action. My client’s former employer (Employer) sued him for breach of non-compete and non-solicitation agreements as well as for allegedly he breached his duty of loyalty. These claims presented several issues, which are likely to come up in other cases.  One such issue is how to pay for attorney’s fees.

A former employee sued by a former employer faces the issue of how to pay for a defense. I do my best to make a defense affordable. Of course, much of the costs is not really up to me. An aggressive defendant can increase the time spent on litigation. A fairly recent case attorneys’ fees exceeded $130,000 (over 18 months of litigation and a one week trial). This is an outlier but cases such as this involve lots of claimed damages (millions), clients who can afford to go toe-to-toe with their former company, bad blood between the parties, and lots of documents. However, in the October 2016 case, the fees and costs were about $29,000 spread out over almost two years.

Anyway you look at it, twenty-nine thousand dollars ($29,000) is a lot of money. Most people cannot afford to pay this sort of money. How did my client manage it? When you factor in the $7500 retainer up front, which paid for the first 4-5 months of litigation, this left $21,500 spread the remaining 17 months or $1,260/month. Since this was a business expense, he was able to pay with pre-tax dollars and for several months was able to put the expense on his business credit card. Fortunately, his business did well enough to absorb these costs spread out over time.

However, my client realized that there was a cost of compliance. He calculated that abandoning his established territory would cost him more than a $100,000 over two years. Factoring in the risk of losing (which we thought was minimal — at first –), he decided that he had no choice but to fight. And so, he did.

On average, non-compete cases cost $10,000 or less. Many times an employer is seeking an injunction, which if the employer loses may result in a quicker resolution. Many times the issues are less factual and more legal. Legal issues require less discovery, which can be the most costly part of litigation. We are able to be efficient in handling the legal issues, and quick and earlier victory can signal to the employer the battle is futile. Of course, this is not always the case.

Many times the best course is not to sign a non-compete at all. The next option is to attempt to negotiate the terms in advance and with the assistance of legal counsel. Perhaps there are terms that both parties can live with: a compromise non-compete. If not, then the employee will need to abide by the agreement she signs after employment ends assuming it is reasonable. However, if the non-compete is unreasonable and unlawful, then folks should plan ahead: Budget and save for the legal fight. Finally, hiring a lawyer with experience to ensure that you get the most efficient legal representation possible. It doesn’t hurt if that lawyer also understands the nature of the battle and is committed to the cause.

Day in Court: A Noncompete and the Duty of Loyalty

I had a trial two weeks ago week.  My client’s former employer (“Employer”) had sued him for breach of a non-compete and breach of the duty of loyalty.  Employer wanted almost $500,0000 in damages on these two claims plus their attorneys’ fees.  My client, now a small business owner, had fought for almost a year and a half before the day of reckoning had arrived. Fortunately, the Court ruled in our favor, although the judge will consider post-trial motions before the decision is final. Yet, while it is fresh on my mind, I wanted to record some of the experience to help readers get a better understanding of the challenges they might face.
Basic Facts
 
My client signed a non-compete agreement two days after beginning his employment as a salesman in south Florida. He worked for about 6 years before resigning.  Before he resigned, Employer assigned another sales person to his territory, which raised his concerns that his income would be reduced or that his accounts might be placed in jeopardy.  His largest account was the school district, which worked on a bid system. There was no solicitations of this account.  The jobs were awarded based solely on price, and relationships played no role in the awarding of purchase orders.  Most sales to individual schools, which were generally smaller, were somewhat different but also came down to price.  Lowest bid won.  And all bids were made public after the fact.
Consideration
 
My client testified that there had been no mention of the non-compete when he was offered the job.  It was undisputed he was not presented with one at the time the offer was made, and he did not sign the non-compete until the third day on his new job.   His employment was “at will.”  South Carolina law states pretty clearly that if a non-compete is entered into after the initial offer of employment (and certainly after the first day of employment), then the non-compete is not enforceable unless the employee received something of additional value.  However, in this case, the court actually determined that there was an “intention” to enter into a non-compete, and its ruling in my client’s favor was not premised on lack of consideration.
Reasonable in Geographic Scope
The non-compete in this case prohibited my client from competing within a 100 mile radius of Miami.  However, this 100 mile radius included much territory that my client had never called on customers.  In fact, it included another sales persons territory, which my client never entered.  And the second salesperson which was placed into this territory by the Employer was because the territory was too big for just one salesperson.  South Carolina law states that a non-compete must be limited to the territory where the salesperson actually called on customers and not simply where the Employer does (or wants to do) business.  The judge ruled the territory was overly broad, and therefore unenforceable.
Non-Solicitation Agreement
 
The non-solicitation prohibited my client from calling on customers or accounts he had solicited during the last 12 months of employment.  Of course, this would include accounts who were not current customers of the employer, which is usually overly broad under South Carolina law.   Moreover, there was no evidence that the accounts my client solicited after he left employment were actual customers of the Employer.  The court ruled that there was no evidence my client had sold to actual customers of the Employer.
Breach of Duty of Loyalty
 
Every employee has a duty of loyalty to his employer while an employee.  If an employee acts disloyal by competing with his employer, then he has breached the duty of loyalty and can be held liable for damages, including his compensation during the period of disloyalty.  However, an employee may prepare to compete in the future.  Here, my client had formed a corporate entity with the Florida Secretary of State.  He had had a friend create a website for his business, although the website had never gone live and had never made any sales through the website.  The court found that merely preparing to compete did not breach the duty of loyalty.
Again, these rulings are subject to post-trial motions.  After a trial, the losing party can make post trial motions to seek a reconsideration of the judge’s rulings.  The Employer has very capable defense counsel who will do a good job trying to pick apart the judge’s ruling.  We will be prepared.  And we will file our own post trial motion directed at the ruling on consideration.  Of course, Employer may file an appeal. However, we are confident the judge’s ruling will stand up, and just as confident that our argument on consideration will provide another basis to uphold this ruling.

New South Carolina Case: Noncompete and Sale of a Business

 As we’ve previously noted on this blog, the basic rule is that for a non-compete agreement to be enforceable in South Carolina, it must be (1) necessary for the protection of the legitimate interests of the employer or purchaser, (2) reasonably limited with respect to time and place, (3) not unduly harsh and oppressive in curtailing the legitimate efforts of the employee to earn a livelihood, (4) reasonable from the standpoint of sound public policy, and (5) supported by valuable consideration. The same standards that govern the enforceability of non-competes for an employee/employer relationship also apply to the use of non-competes in the sale of a business.

In Palmetto Mortuary Transport, Inc. v. Knight Systems, Inc., the South Carolina Court of Appeals recently reviewed the enforceability of a non-compete in the sale of a business context. This non-compete prevented seller Knight Systems, a mortuary transport business based in Lexington County, from competing against new buyer Palmetto Mortuary anywhere within 150 miles of Lexington County, which is where the Knight’s business was located, for a period of ten years. Four years later, Knight began competing against Palmetto in Richland County (adjacent to Lexington County) in violation of the non-compete. Palmetto sued Knight for breach of the non-compete provisions (among other claims as well). Palmetto won at the lower court level, but Knight appealed.

The Court of Appeals, upon reviewing the case, determined that the 150 mile geographic restriction was overly broad and unenforceable. The court noted that the original business only operated in Lexington and Richland counties, but the 150 radius purported to keep Knight from competed in a much wider area (i.e., much of South Carolina and parts of surrounding states). Because Palmetto Mortuary had no legitimate business purpose in keeping Knight from competing in areas that Knight had never done business before, the court struck down the entire agreement, and refused to re-write the contract (or “blue pencil” it) to make it more reasonable.

This case should encourage employers and those selling their business to draft their non-competes with a more reasonable geographic scope (or else risk a court throwing the non-compete out altogether). But those who are asked to sign a non-compete should keep in mind that even if their non-compete is probably unenforceable, an employer can still sue to enforce it and cause the employee a lot of stress and attorneys’ fees.

We always recommend that you have an attorney review your non-compete (or non-solicitation or non-disclosure) BEFORE you sign it, but if you’re in a situation where you’ve already signed one and are facing a pending lawsuit, then you should speak with an experienced South Carolina non-compete attorney immediately.

 

Jury Trials for Attorney Fees In Breach of Contract Case

So, one of the risks of fighting a non-compete is the provision that require employees to pay for their former employer’s attorneys fees if they lose the case:  Seems fair.  But, of course if fairness were the issue, the provision would be reciprocal and provide attorney’s fees for prevailing employees.  And the standard for the amount is “reasonable attorneys fees,” and we know reasonableness is truly in the eye of the beholder. The first take away is to beware of fee shifting provisions, and if you have a chance to actually negotiate your agreement, make sure the fee shifting is a true mutual obligation.

Recently, I tried a case in which the former employer proved a breach of the agreement and sought attorneys fees in the amount of  $750,000+.  (Of course, this was a 6 year case.)  And much of my experience is in litigating cases with fee shifting statutes, and those fees are awarded by the court and not the jury.  But, the fee petition was so large, three times what the damages for breach were, and it seemed to me that an attorney’s fees claims should be a jury issue. A one week trial on lost profits, but an half hour hearing on three-quarters of a million dollars.  So, I researched the issue and found that the issue of attorneys fees in contract cases may trigger Seventh Amendment rights.

Continue reading

What Happens When A Non-Compete Case Goes to Trial?

I have tried three cases in the last 12 months, but none more difficult than a non-compete case in Lexington County.  The judge did not grant summary judgment on the non-compete or non-solicitation provisions, and my client had conceded he breached the non-compete.  The defendant was permitted to argue he was entitled to $2.7 million in lost profits, which encompassed a 5 year period although the non-compete was 1 year long.  A jury deliberated 5 hours before asking for a calculator, and another couple doing math.  When it was all said and done, the defendant will receive a breach of contract remedy that is 10% of the lost profits sought and one-half of the first settlement offer.  But the motion for attorneys fees’ is still pending.  (Defendant asked for a figure in excess $700,000.).

Well.  This case has a lot of “boots on the ground” experience to dissect.  Couple if quick take aways for now:  

1. It is cliche, but you never know what a jury is going to do.  This verdict appears to be an inconsistent verdict; it may be a compromise verdict; it is likely a confused verdict.  But, do the parties really want to try this one all over again?  Cost-benefit says “no.” However, rationality gets lost in the passion for revenge that can infect these cases.

2. Judges do not wade very deep into non-competes that often.  The appellate law in the state of South Carolina is not as clear as it could be.  The law has evolved slowly over the last 50 years, and sometimes in ways that appear to be inconsistent.  This lends itself to variability and lack of predictability at the trial court level.  

3. There is a fairness standard that seems to underpin much of what drives juries, and in the present political and cultural environment, juries in certain locales and/or in response to certain fact patterns are not as hostile to non-competes as one might guess.  Whoever wins the fairness battle, wins the war.  And, if there is a split decision in the fairness equation, then verdicts tend to reflect that through a compromise verdict.

Conditions 1, 2 and 3 make an appeal likely.

More soon.

Ten Proverbs for Litigators

Wisdom WayTrying cases is what I think I do best.  There are some lessons that I have learned along the way.  Twitter helped be shrink them down to 140 characters or less.  Here are my top 10:

1.  Cases are won as much by facts forgotten as facts remembered.

2  If truth is in the middle, then so will be the verdict.

3.  Juries tend to make humble lawyers proud and arrogant lawyers humble.

4.  The billable hour, whether your own or another’s, will dictate the course & length of litigation more times than not.

5.  If you don’t pay attention to the trivial aspects of your case, the jury just might. Know thy case.

6.  Don’t ask, if you don’t already know.

7.  Jurors want to know you believe in your case before they believe in it.

8.  If you don’t like your client, the jury surely will not.

9.  Moderation in all things, except your passion for your case.

10.  Make your case a cause.

[From my blog Blogger at Law. These lessons are just as applicable to efforts to beat a non-compete.]

Physician Non-Competes Upheld by South Carolina Court of Appeals: Baugh v. Columbia Heart Clinic, P.A

In its first non-compete case involving a physicians, the South Carolina Court of Appeals used mostly well-trodden commercial case precedent to reverse a bench trial holding that the agreements were unenforceable and awarding relief under the Wage Payment Act in Baugh v. Columbia Heart Clinic, P.A., 2013 S.C. App. LEXIS 5, 20 Wage & Hour Cas. 2d (BNA) 202 (S.C. Ct. App. Jan. 16, 2013).  Baugh involved two cardiologists who left Columbia Heart in 2006 and, within one month, established their own cardiology practice approximately 300 yards from Columbia Heart’s then-new Lexington County facility.  The doctors sought an injunction preventing enforcement of no-compete agreements based on forfeiture and liquidated damages clauses that were intended to prohibit them from practicing or assisting in the practice of cardiology for one year within 20 miles of Columbia Heart offices where they had routinely practiced.

 The Court of Appeals upheld the non-compete in a set back for all employees as well as consumers of medical services.  Non-competes in the medical field (like many others) limit choices and limit supply for services.  However, Baugh ignored robust debate in other states– including a  pronouncement by the American Medical Association — concerning what some consider the injurious  public impact of physician non-compete agreements. Among the other holdings in Baugh, Court of Appeals held the following:

  •  the non-compete agreements at issue in the case were supported by consideration (a $5,000-per-month/ $60,000 total for compliance with the non-compete agreement) ;
  • liquidated damages for each doctor of one year’s W-2 income of roughly $591,710 and forfeiture by each doctor of $240,000 — in  a combination earned but unpaid salary, pro rata shares of accounts receivable, and the $60,000 noted above  — were not penalties; and
  • unpaid salary and accounts receivable, along with director’s fees, were not wages “due” under South Carolina’s Wage Payment Act (on the rationale that the doctor’s forfeited their rights to these items).

There were several issues that deserved greater consideration–for more in-depth treatment click and read on. Continue reading

Andy Arnold Named One of Greenville Business Magazine’s Legal Elite

FOR IMMEDIATE RELEASE

GREENVILLE, S.C. – Greenville Business Magazine has recognized Andy Arnold as one of the area’s Legal Elite in the practice of Labor and Employment Law.

In its first-ever survey, the magazine sent emails to 850 Greenville-area lawyers and asked them who, in their opinions, were the best lawyers in 20 practice areas. Respondents could nominate lawyers in their firms, but for each in-firm lawyer there had to be an out-of-firm lawyer nominated, although not necessarily in the same practice area.

A total of 95 lawyers were identified by their partners and peers as the Legal Elite of the Greenville area.

Greenville Business Magazine will honor the Legal Elite with a reception Aug. 16 at High Cotton.